The Dow Jones Industrial Average ($DOWI) has risen sharply this week, and is now comfortably above the psychologically important level of 40,000. Meanwhile, Disney (DIS) - which was the best-performing Dow stock at one point this year - is now up just about 9% for 2024, which is similar to the index's YTD performance. Also, DIS has lost nearly half of its market cap from the 2021 peak. Can DIS stock recover and go back up as stock market laggards begin to participate in a “catchup” trade? We’ll discuss in this article.
Disney’s Fiscal Q2 Earnings Spooked Investors
Disney shares tanked in May after the entertainment giant missed consensus revenue estimates for fiscal Q2 2024, and gave soft guidance for Q3. Incidentally, the blue-chip has missed topline estimates for four straight quarters, highlighting the troubles it faces in growing revenues.
However, it was not all gloom and doom in that earnings report, which showed that Disney+ and Hulu reported a combined operating profit in the quarter. Even after accounting for ESPN+, the combined streaming loss was a mere $18 million.
The company’s streaming business has been a sore point with investors, and that segment’s quarterly operating loss peaked at nearly $1.5 billion in fiscal Q4 2022. Under CEO Bob Iger, who took over the baton shortly after Q4 2022 earnings, Disney has been able to nearly break even, and is confident that the streaming business will become profitable by the end of this fiscal year.
Disney is a Mix of Several Businesses
Disney’s business is quite diversified, and broadly includes the following:
- Linear TV assets: This is perhaps the weakest segment for Disney, and continues to underperform amid cord-cutting. However, that's more of an industry-wide phenomenon, and is not limited to Disney.
- Theme parks: Theme parks are literally the bread and butter for Disney, and have largely stood the test of time despite various controversies and intermittent issues.
- Movies franchise: The company’s movies franchise is a key part of its business, but sagged over the last couple of years.
- Streaming: Streaming is a potent addition to Disney’s arsenal, and while the business has reached a critical mass, it is still not contributing to the bottom line.
Here's Why Disney Stock Should Recover and Go Back Up
Disney stock is up a mere 13% over the last 10 years, which is not the kind of returns the iconic brand might want to brag about. Its dividend yield is also below 1%, so it's not as though shareholders were rewarded with a fat dividend to help offset the dismal price action.
However, I believe Disney should recover and go back up, as DIS looks to be among those rare stocks that still offer reasonable value in these markets.
First, while the linear TV business might continue to be a weak point, the content produced for that platform adds to Disney’s content slate for streaming. Second, Disney is addressing the issues at its parks, and has committed to invest $60 billion in its Parks segment over the next 10 years. This should help to address some of the concerns about service and wait times that many visitors have flagged over the last couple of years.
Third, while Disney’s movie franchise underperformed in the previous 2 years, the company is now prioritizing quality over quantity. Its “Inside Out 2” is not only the most successful movie at the box office this year, it's also the fourth most successful animated movie ever.
Finally, while markets have been fretting over streaming losses, Disney+ (including the low-priced Disney+ Hotstar) has over 150 million subscribers, and the business is breaking even within five years, which is no small feat.
Disney Stock Forecast: Analysts Rate It as a “Strong Buy”
Wall Street analysts have given DIS stock a consensus rating of “Strong Buy,” and its mean target price of $127.42 is almost 30% higher than Tuesday’s closing prices. The sell-side analyst community’s optimism toward Disney is not without a reason.
Disney’s earnings are expected to grow at a strong pace over the next couple of years, due in part to the $7.5 billion in annual cost savings, which Iger said the company is on “track to meet or exceed.” The streaming business should also start being a net contributor to the bottom line, instead of dragging it down. While the company's streaming business is not expected to deliver “Netflix-like” (NFLX) margins anytime soon, they should improve gradually and help to boost the company's overall profit margins.
The focus on video games through a $1.5 billion investment in Epic Games, which is the publisher of the globally popular video game Fortnite, should also be a growth driver. Disney has also announced the launch of a sports streaming platform jointly with Fox and Warner Bros. Discovery (WBD), while reiterating the 2025 launch of an ESPN streaming service. Sports streaming could be among the key growth drivers for Disney going forward.
From a valuation perspective, Disney stock trades at a next 12-month (NTM) price-to-earnings (PE) multiple of just over 19x, which is a discount to the average S&P 500 Index ($SPX) constituent.
Overall, given its strong moat, decent growth prospects, and reasonable valuations, I find Disney stock a good buy at these prices.
On the date of publication, Mohit Oberoi had a position in: DIS . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
